There are two types of carbon markets, the compliance market (trading of emission rights resulting from legal and regulatory requirements); and the voluntary market (resulting from companies’ voluntary climate commitments). While the compliance market mainly driven by emissions trading systems (ETS) has been operational since the mid-2000s, the voluntary carbon market (VCM) has gained ground in recent years. The VCM is led by companies and industries in hard-to-reduce sectors that rely on carbon credits to meet their ambitious “voluntary” climate goals. This market has grown over 60% from 2020 to reach $1 billion in November 2021 and is expected to reach at least $50 billion by 2030. One of the differentiators of VCM is the premium pricing assigned projects that generate co-benefits such as biodiversity. conservation, gender and community economic development. Carbon credit prices for these projects can vary widely from $5/tCO2e (e.g. agriculture, forestry, etc.) to $25/tCO2e (e.g. clean cooking for low-income households) depending on the type of co -benefits (1 tCO2e is equal to 1 carbon credit).
These additional revenue streams from carbon credits have the potential to fundamentally alter the economics of key activities such as agriculture, forestry, cooking and waste management – possessing the potential for social, economic and environmental impact. raised. These activities are either able to remove carbon from the air or avoid emissions by adopting better practices and technologies. They play a key role in empowering local communities by:
- Act as an additional source of income for smallholder farmers, while creating co-benefits such as creating livelihood opportunities for local communities
- Protect coastal areas and local communities from extreme weather events in the event of mangrove plantations
- Improve agricultural productivity through improved watershed, cooler microclimate, prevention of soil erosion and increased biodiversity.
For example, a low-income household using traditional stoves can reap carbon benefits by switching to cleaner cooking solutions; and smallholder farmers can benefit from planting trees and changing farming practices to reduce GHG emissions without harming productivity. Carbon credits from these activities can earn nearly $20-40 per year for a household that switches to clean cooking and $7-20 per year per acre of additional income for smallholder farmers.
Carbon markets can play a very critical role in India’s journey to achieve its net zero emissions and decarbonization goals, as well as catalyze certain key sectors such as transport, agriculture, forestry, management waste, etc. While India is aggressively reducing emissions intensity from many sectors, it would still rely heavily on the carbon market to offset residual emissions to achieve net zero. The resulting carbon market is estimated to be at least $50 billion. This estimate only takes into account seven hard-to-reduce sectors, namely cement, steel, aluminum, electric utilities, aviation, automotive (passenger cars), oil and gas (refining and extraction). Additionally, India can achieve a potential carbon market of $30-50 billion by 2050 (at a conservative price of $15 per carbon credit) through agriculture, land restoration activities and reducing emissions from deforestation and forest degradation (REDD+).
The rapid growth of carbon markets, coupled with a dynamic international policy environment, is pushing countries to develop action plans to leverage carbon markets to meet their climate commitments. India is already working proactively to shape the national carbon market with the Ministry of Environment, Forests and Climate Change (MoEFCC) and Ministry of Energy (MoP) developing the legal, institutional and technical infrastructure required. Once developed, these could address aspects related to double counting, corresponding adjustments, and issues of quality and integrity of carbon credits, particularly in the compliance market.
While the domestic compliance carbon market is critical to India’s net zero ambitions, there is significant opportunity to leverage the voluntary carbon market. We can be one of the main destinations to attract global capital pools looking for voluntary carbon projects in the Global South. For this, a more structured mechanism for private sector participation in voluntary carbon credit projects is needed. India’s proactive approach on developing a framework to promote public-private partnerships and to attract private investment in carbon projects through inclusive business models can unlock significant social, economic and environmental benefits.
(The author is Managing Director, Clean Energy, Climate Change and Agriculture, Intellecap)
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